What lessons are offered for Teaching Economics from the current crisis?

People ask how I think introductory economics teaching should change as a result of the financial crisis. It’s an important question. At the upcoming American Economic Association Annual Meetings, my colleague Bob Hall, next AEA President and Program Director, has included on panel on the topic.

Clearly we need to include more on financial markets, but based on my experience teaching in the two-term introductory course at Stanford, I think the single most important change would be to stop splitting microeconomics and macroeconomics into two separate terms. The split has been common in economics teaching since the first edition of Paul Samuelson’s textbook, which put macro first. Many courses now have micro in the first term and then macro in the second.

But regardless of the order now used, I think a reform that integrates micro and macro throughout is worth considering. There were arguments for doing this before the crisis, including the fact that in research and graduate teaching the tools of micro have now been integrated into macro.

I have always found the distinction between macro and micro very confusing.

You come across economists who say I am a macro person and don’t follow much of micro and vice versa. It is actually seen as a statement of prestige – what person (micro or macro that is) you are – and is followed by nods and appreciation by fellow economists. But there are so many linkages between the two, how can you possibly be from different fields. I can understand the area of research is different but that is where it ends.

The distinction is appalling in the case of professors of finance. I mean why the distinction. You have professors of economics with specialisation in healthcare, international trade, agriculture, development etc. Same should be the case with finance as well. Clearly the academia has also been taken by the finance tide/wave. Then there are some professors of finance (atleast I have met them) who have a very limited know-how of economics especially macroeconomics. Much of financial markets move because of developments in economy, so you cannot ignore it. But Professors of finance can.

Then you have students who study finance. Most have a very limited knowhow of economics. Infact, you can pass as an MBA in finance without understanding the linkages of economics. This clearly is a problem with the way they are taught and not really a problem of students.

Prof Taylor further explains:

The financial crisis clinches the case for full integration in my view. The crisis is the biggest economic event in decades and it can only be understood with a mix of micro and macro. To understand the crisis one must know about supply and demand for housing (micro), interest rates that may have been too low for too long (macro), moral hazard (micro), a stimulus package (macro) aimed at such things as health care (micro), a new type of monetary policy (macro) that focuses on specific sectors (micro), debates about the size of the multiplier (macro), excessive risk taking (micro), a great recession (macro), and so on. It you look at the 22 items that the Financial Crisis Inquiry Commission has been charged by the Congress to examine, you’ll see that it is a mix of micro and macro. Defining the first term as micro and the second term as macro, or visa versa, is no longer the best way to allocate topics.

This is precisely the problem with teaching finance without much attention to economics. They are not mutually exclusive subjects!

Prof Taylor is already trying to usher changes this time at Stanford. He also points to challenges that text-books are still carry micro-macro distinction. But it is not hard to mix and match. Read the post for details.